On 9th March 1999, the Inland Revenue issued a press release detailing how  they were to close the loophole that allowed freelancers and contractors to avoid paying large amounts of tax and national insurance by using a personal service company, composite company or business partnerships. This press release was called IR 35, and the legislation it announced has generally been referred to as IR35 ever since.

The government identified contractors as 'tax avoiders', due to the tax saving benefits they enjoyed from working through a Limited Company/Personal Service Company, whilst their underlying status was clearly that of a “deemed employee” The IR35 legislation was implemented in April 2000.

IR35 has resulted in increased tax, NI liability and administration for those contractors using a Limited Company/Personal Service Company. IR35 made the use of Umbrella Companies significantly more attractive and more recent “Legislation to tackle Managed Services Companies” introduced in the Budget 2007 increased the appeal of umbrella companies further.

The 2007 legislation targeted the growing number of freelance workers who used structures known as composite companies - an approach that grouped a small number of contractors together into a “virtual” company structure, deemed them all to be directors and shareholders and as such paid them as self employed contractors. This enabled them to receive a portion of their income as dividend payments, ultimately meaning they paid less tax than if engaged under an employed structure.